Monday, June 29, 2009

Is Gold a Good Investment?

Lately you hear people talking about Gold more and more, and you hear them saying to buy it, and buy as much as you can. There seem to be a lot of crazy ideas going on about Gold, experts like Peter Schiff who I respect and who called the real estate bubble says that Gold could go as high as $2000 an ounce. There are also crazy late night infomercials cash for gold where you send in your gold for a very small amount of cash. Then there are some that claim it's time to start shorting Gold.  So the question remains, is "Is Gold a Good Investment"? Well for one thing it is not an investment at all, buyers are "speculating" on its future price, they are not investing in a growing business, nonetheless it can be useful to investors. 

Gold has also been used in the past as currency for different cultures for thousands of years. Up until 1971, all US dollars were convertible into gold on demand. This itself makes it very unique from other commodities not to mention all the other things gold has been used for over the span of 5000 years.

Barry Ritholtz has some interesting takes on gold, some of his points are:
In times of turmoil, gold always seem to be a safe haven. Gold has not been dependent upon any state or government, unlike paper currency, its worth comes from the willingness of people over history to assign a specific value.
He also says:
"Gold is a store of value, a way to maintain wealth over time(capital preservation);stocks on the other hand, represent a way to generate a return on value(capital growth)."
"Equities do well when there is low inflation(and no deflation), stable currency, economic growth, strong property rights, the rule of law and most of all, political and economic stability."
The exact opposite conditions are good for gold's value. We are seeing just that with the price of gold. The global economy has been hit with inflation over the last half decade (because the U.S. Federal Reserve ultra low rates after the 2001 market crash).  Also we have been seeing no political stability with the last and present administrations (Bush driving us towards the cliff and instead of turning Obama is just stepping on the gas - Peter Schiff). Add to all this the Real Estate and Credit crisis and you have the perfect environment for gold prices to gain value.

So should we own gold? Barry Ritholtz says to consider 3 things:

1. Easy money has probably been made - gold went from $250-$1000 and since March 2008 gold has mostly gone sideways.

2.Contrarians like to buy assets that have become cheap and sell assets that have become dear. He has been bearish on stocks, but since they have been cut in half they have been constructive on equities. Some ETF's he did point out where (GLD, NEM, RGLD) as inflation hedges.

3. Since gold is a safe haven during periods of unrest, it could become more attractive if it unwinds even more. He says to watch and see if the spot price of gold moves above $1000 or if (GLD) trades above $100, he recommends buying in these circumstances.

As far as what I am doing, I am just sitting back and kinda watching. Gold works well as a inflation hedge. I think everyone should have a little bit for having a diversified portfolio. I would stay away from aggressively buying , unless the some of the circumstances change. And with this administration, anything can change, and as I see it, it is changing fast.

Leave a comment and let me know if you will be buying gold anytime soon. Should everyone have a little gold?


  1. I've thought about gold every now and then. Personally, I wonder what will be happening with Silver, as it has some pretty significant industrial applications. Either way, there is a finite amount of these precious metals unless some alchemist finally figures out how to turn lead into gold. Scarcity will equal profits, one way or another.

  2. I honestly don't think I'd every buy Gold. If I want to hedge against inflation I'll buy real estate, to each their own.